08 February 2010

ECONOMIC PROSPECTS

Americans are finally saving and paying down debt rather than increasing it. Unfortunately the government is increasing debt, with Treasury debt up 41% over the past year while consumer and business borrowing is down 20%. So we have an odd situation of people behaving properly while their government goes profligate “stimulating” nothing but government growth. The more this goes on the harder it is going to be to undo, and the result will be catastrophic national bankruptcy. But I’m optimistic it will be undone because the public will demand it, and it can’t happen too soon.

Productivity has been skyrocketing, increasing at a 5.7% rate last quarter. These are the only silver linings in this recession, as they provide a potential foundation for stable, robust growth in the future. But presently no one is hiring, unemployment is at 10%, and closer to 17% if you include those not looking for work or underemployed. Instead more and more productivity is being wrung out of existing employees who are often sullen and overworked. Capital is on hold as companies put off the purchase of capital goods, which would otherwise revive the industrial economy, which has been hit hardest. So how do we get these people back to work? The answer is new investment in industrial production, which ought to be encouraged with rapid depreciation and tax policy. Instead, apart from a bone thrown at small business, we are “investing” in government, which will not produce anything and instead will tax the economy with further burdens and thereby slow growth and recovery.

Thus the answer is pretty simple. People are unemployed in the private economy. The only way to get them employed is to encourage investment, which in turn will encourage production. To the extent that government gobbles up resources, and worse, runs up debts, there is that much less left to spur private investment and growth. The more incentives there are to invest in new goods and activities, the more jobs will be available and the more the economy will grow. What we need then is smaller government providing tax incentives and reductions to spur growth. Instead we currently have a growing government that will only increase the burden on everyone. This is the real “change” we need.